Financially Illiterate

There's something bizarre about our society that we don't seem to realize is a problem. Smart, educated college graduates starting their first job seem to have no idea how to approach some of the most basic questions of financial survival. And some of them never seem to figure it out.

I asked a recent Harvard graduate living in New York about his financial life:

Annual salary: $70,000
Credit card debt: $4,000
Monthly student loan payments: $250

He's just gotten a new job that pays better, and he is looking to find a place on his own. He's decided to opt for the best health, dental, vision, and life insurance plans through his employer. He's also looking to pay down his debt, so he's only using his debit card. In addition to paying down his credit card (which has a 19% APR), he's also making extra student loan payments so he can erase his student debt.

He wants to try and find a place to buy after a year, since he hates throwing money away on rent. He's going to save 15% of his income each month in a Bank of America money market account so he can have a small downpayment within a year or two.

The funny part about this story is that most people would think he's making all the right moves. Paying down debt, saving, getting good insurance, and even making a potential home purchase. The sad part is that many (actually, most) of these decisions are wrong. They are the result of conventional wisdom, rather than real financial savvy.

In subsequent posts, I'll talk about the factors that one should think about in their financial life, like the decisions the person above makes. Saving, investing, taxes, insurance, renting, buying, loans, credit cards, and more.